Israeli startup raising dips in Q1 2017

Israeli startups raised $1.03 billion in the first quarter of 2017, down 8% from the corresponding quarter of 2016, IVC-ZAG reports.

In the first quarter of 2017, Israeli high-tech companies raised $1.03 billion in 155 transactions, according to the latest report by IVC - ZAG (Zysman, Aharoni, Gayer & Co.) law firm. This amount is 4% down from $1.07 billion raised in 165 deals in the preceding quarter and 8% down from$1.11 billion raised in 174 deals in the first quarter of 2016.

The number of transactions was down 10% in the first quarter of 2017 compared with the quarterly average of 172 deals in the previous three years. The average financing round reflected a slight increase, with $6.6 million, compared to the $6.5 million and $6.4 million averages in the preceding and corresponding quarters.

Early rounds - seed and A rounds - fell 16% and 31% respectively, with only 37 seed rounds and 40 A rounds closing in the first quarter of 2017, totaling $247 million, 8% down from $267 million raised in early rounds in the preceding quarter, and 23% down from the $320 million raised in the corresponding quarter of 2016. The number of all later rounds (B, C and later) was up 20% with 78 deals in the first quarter of 2017 compared with 65 deals in the preceding quarter, and only 5% above the 74 deals in the corresponding quarter of 2016. In terms of capital raising, only C rounds managed to top their previous record, with $285 million raised in 17 deals in the first quarter of 2017, compared with $100 million (9%) raised in the previous quarter and $234 million (21%) in the corresponding quarter of 2016.

Adv. Shmulik Zysman, founding partner of ZAG-S&W (Zysman, Aharoni, Gayer & Co.) international law firm said, "Although 2017 started as a strong and stable year for Israeli high-tech capital raising, with figures similar to previous quarters, the number of financing rounds in the first quarter was the lowest since the corresponding quarter in 2012, while the number of new startups continued to grow. We expect the Mobileye deal - which shifted paradigms regarding valuations of Israeli companies - to have future impact on the industry in terms of growth in capital raising volumes. The deal is yet another proof of the high quality and standards of Israeli companies."

He added, "The fact that most of the capital goes into mature companies currently reflects, on the one hand, the maturity of companies today, but also the low appetite of investors for young companies, which embody greater risk. If it continues, this trend is liable to harm young companies' ability to realize their potential. In addition, according to the report, most of the capital injected into the Israeli market continues to come from abroad. Thus, it emerges that high-tech investments in Israel are biased toward foreign investments in low-risk companies, which is liable to affect the future of Israeli high-tech as a whole."

In the first quarter of 2017, venture capital-backed deal-making was down, with both the proceeds and number of deals shrinking noticeably. These figures mark the lowest point in venture capital fund investments since the second quarter of 2015, with $577 million in only 68 transactions, a 19% fall from $710 million in 95 deals in the preceding quarter, and 26% down from $777 million raised in 100 venture capital-backed deals in the first quarter of 2016. While capital raised in financing rounds involving venture capital funds marked the lowest point in venture capital fund participation since the second quarter of 2015, the number of venture capital-backed financing rounds was the lowest quarterly figure recorded since 2010. The average venture capital-backed financing round in the first quarter of 2017 was up, however, with $8.5 million, compared with $7.5 million and $7.8 million in the preceding and corresponding quarter of 2016.

Israeli venture capital fund investment activity

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Israeli venture capital funds invested $162 million or 16% of total capital in Israeli high-tech companies in the first quarter of 2017. The amount was 26% above the $129 million invested in the preceding quarter and 17% up from the $138 million invested in the corresponding quarter of 2016. Israeli venture capital funds' share was up in the first quarter of 2017, compared with these two quarters, when their share reached 12% of total capital each.

The IVC-ZAG Survey reveals that this upturn stems from the increase in first investments made by Israeli venture capital funds in the first quarter of 2017 - $87 million, or 54% of their investments. The share of first investments was up, compared with 45% in the fourth quarter of 2016 and 31% in the first quarter of 2016. While Israeli venture capital fund investment in the past tended to lean towards early stage investments, in the first quarter of 2017, 65% of first investments went to late stage companies.

IVC Research Center CEO Koby Simana said, "Our analysis shows that venture capital funds, both Israeli and foreign, are shifting their activity focus to investments in later stages – in terms of companies' product development stage, financing stage or capital raising round. This change creates a void in the early stages that is not fully met by other investors, such as accelerators or private investors. On the one hand, it creates an opportunity for new investors willing to focus on young startups and early stage companies without much competition, but on the other hand - spells danger to the future of the local venture capital model. If venture capital funds pass up the opportunity to join at early stages and hold the majority of shares in a company, they will have less control over their deal-flows. If there are no investments in early stages and early rounds now, two years down the line there could well be a shortage of promising late stage companies."

Capital raised by stage

Mid-stage companies continued to lead quarterly capital raising in the first quarter of 2017, with $478 million (47%), 11% below the $534 million raised in the preceding quarter, the highest quarterly amount for this stage, but 17% above the $409 million raised in the first quarter of 2016.

The first quarter of 2017 was the weakest for early stage rounds in three years, with 41 companies raising only $199 million, or 19% of total capital.